10-year Treasury yields hit highest in a month

Market absorbs first in trio of debt auctions

NEW YORK (MarketWatch) — Treasury prices fell Tuesday, sending benchmark yields to their highest in nearly a month after a lackluster auction of 3-year notes.

The 10-year Treasury note
US:10_YEAR
yield, which rises as prices fall, was up 2 basis points on the day at 2.635%, according to Tradeweb. That’s the highest since May 12 as yields bounced off an 11-month low at the end of last month.

U.S. government debt held onto price losses after the Treasury Department sold $28 billion of 3-year notes
US:3_YEAR
The offering is part of a $62 billion trio of sales this week, which has helped push the market lower as it absorbs new supply.

“Supply this week was keeping the market a bit heavy,” said Kim Rupert, managing director of global fixed-income analysis for Action Economics LLC. The market has also been falling as investors rethink their views of when the Federal Reserve will begin raising its key lending rates, she added.

The 3-year notes sold at a yield of 0.930%, as the broader market was near its highest of the day. After the sale, the 3-year note traded at a yield of 0.886%.

Bidders offered to buy 3.41 times the amount of debt sold, compared to an average of 3.37 times during the past six sales. Indirect bidders, which often include foreign central banks, bought 26.5% of the sale, compared with 32.3% in recent offerings. Direct bidders, which include domestic money managers, bought another 19.4% of the sale, compared with 19.2% in recent auctions.

“It was disappointing. Going into it, I heard both sides and it looks like the cons won out,” said Rupert. Strategists at Nomura Securities gave the auction a grade of B.

Treasury yields had been falling sharply over the past two months as demand crested amid concerns about economic growth and the timing of the Federal Reserve’s policy normalization. A build-up of positioning caught many investors on the wrong side of the trade, exacerbating the drop in yields.

However, with some of that positioning cleansed, traders and strategists say that underlying economic conditions and their impact on Fed policy may return as key market drivers.

With inflation drifting higher and the labor market continuing to improve, that may begin to pressure bond prices as investors begin to expect a more aggressive set of rate hikes from the central bank, according to Allan von Mehren, chief analyst at Danske Bank Markets.

“When the Fed first started talking about tapering of asset purchases in May last year it had quite a big impact on the bond market,” he wrote in a Tuesday note. “Although we do not expect a similarly strong reaction this time, the start of a debate about the timing of the first hike will likely lead to upward pressure on bond yields and support a stronger USD.”

Treasurys held losses after data showed that U.S. employers hired at the fastest pace in almost six years during the month of April, a sign of strength in the labor market.

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